As Europe’s growth prospects take a beating, critics of austerity seem to be riding high. In France, the Socialist Francois Hollande seems poised to be elected president on a wave of protest over record high unemployment in the euro area. Meanwhile, the fiscally hawkish Dutch government has fallen victim to its own rhetoric, after failing to gain the backing of its parliamentary supporters for a new package aimed at adhering to the new European Union (EU) Fiscal Compact deficit rules. Even Mario Draghi, the beleaguered European Central Bank (ECB) president, has begun talking about the need for a “growth compact.” It would seem that Europe’s “reflationistas” are on a roll.

But a closer look at these developments suggests a more limited future shift. Draghi’s recent remarks about a “growth compact” were a call, not for a loosening of fiscal policies, but rather for a coordinated acceleration of structural reforms of labor and product markets in the euro area “to facilitate entrepreneurial activities, the start-up of new firms and job creation.“1 The ECB is not signaling any change of course.

Similarly, in the Netherlands, no real policy changes are in the offing. Yes, the government of Prime Minister Mark Rutte fell and new elections have been called for September. (Note to American readers: parliamentary democracies that cannot agree on budgets call for new elections; “continuing resolutions” to keep the government going do not suffice.) The collapse of the center-right government resulted, however, from a withdrawal of parliamentary support by the populist Freedom Party of Geert Wilders, which had little choice politically. Like other successful European populist parties, the Freedom Party is an amalgamation of right-wing anti-immigrant policies and left-wing pro-welfare policies tailored to low skilled and low income groups. Acceptance of the new Dutch austerity measures by Wilders would have been akin to his agreeing to double Muslim immigration.

More important for the future direction of Dutch fiscal policy is what happened next in The Hague. Having been “de-friended” by Wilders, Rutte reached a budget deal with several smaller opposition parties, including the GreenLeft party, to meet the EU fiscal target. This deal included a series of sensible long-term measures. Among them were an accelerated increase in the Dutch retirement age, the elimination of the mortgage interest rate deduction for interest-only mortgages, higher taxes on coal fired power plants, public worker salary freezes and a 2 percentage point increase in the Value Added Tax (VAT). Even if the forthcoming election yield a new governing coalition in the Netherlands, these are the kinds of balanced longer-term budget measures that the euro area needs to implement. The Netherlands is not shifting political direction. On the contrary, the political upheaval highlights the dangers of center-right coalitions relying on populist parties for parliamentary support and the value of flexibility in replacing such reliance with a sensible bipartisan political agreement.

As for Hollande’s likely victory on May 6 in France, much has been written about an inevitable clash between him and Chancellor Angela Merkel of Germany over the new Fiscal Compact that she signed with others, including Nicolas Sarkozy, and the possibility of Hollande pressing for fiscal stimulus to try to restart economic growth. In the campaign, candidate Hollande has suggested that he will be able to accomplish these things. The post-election reality will be different.

First, a President Hollande will, at least initially, be a lone center-left leader in Europe. Only the newly elected prime minister of Slovakia, Robert Fico, governs as a center-left leader in the European Union today, though center-left leaders head centrist coalition governments in Austria, Belgium and Denmark. Hollande will have a tough time swaying his euro area partners toward fiscal stimulus, especially because Germany’s economic dominance remains unaffected by the French election results.

In addition, perhaps to the chagrin of the New York Times editorial pages and other European stimulus addicts, Hollande is less radical in his proposals than in his campaign rhetoric. His positions are close to those of the German Social Democrats (SPD). He has not in fact completely rejected the Fiscal Compact. Instead he calls for it to be supplemented by an unspecified “growth component.” Indeed a political compromise with Hollande could be taking shape in the recent discussions by both EU Council President Herman van Rompuy and Chancellor Merkel about expanding the European Investment Bank’s capital and undertaking other potential investment stimulants. Such steps will hardly be enough to turn the euro area economy around in the short-term. But they could form the basis for a Hollande-Merkel political agreement ahead of the June 2012 EU Summit. Such an agreement could also bring the German SPD into helping to ratify the Fiscal Compact Treaty in the Bundestag, without marking a serious change in euro area fiscal policy.

Little is known about how Hollande would govern. As a good populist, he has called for a 75 percent tax on incomes exceeding €1 million and the hiring of 60,000 teachers. But he has also promised to balance the budget in 2017, only a year later than President Sarkozy, a change from what socialist candidates have campaigned on traditionally. Having embraced a balanced budget, Hollande is not likely to force through a radical rethinking of euro area fiscal policies. Tinkering at the edges and a slight delay, perhaps, but no return to the excesses of the French left’s past. This is how much the crisis has shifted the entire European political spectrum on fiscal policy.

Hollande faces a number of additional constraints. At 4.6 percent, the French deficit in 2012 as predicted by the International Monetary Fund’s World Economic Outlook (WEO) in April is the fourth largest in the euro area2 and higher than that of Portugal, which is an IMF program country. With a 90 percent ratio of gross debt-to-GDP, budget tightening is unavoidable.

More important, however, the next French president faces structural challenges in revitalizing the domestic economy.

Spain is understood to have the most dysfunctional labor markets in the euro area. But according the broadest possible metric, that distinction goes instead to France. Unemployment levels are typically the politically most sensitive measure of labor market distress. But as in the United States, a decline in the jobless rate could be caused by large numbers of people leaving the workforce. Unemployment levels also do not reflect “under-employment”—reduced hours, silly regulations like the French 35-hour work week, or forced part-time work.

A better measure of a country’s economy and labor markets is hours worked per capita, taking the total hours worked divided by the total population.3 This calculation thus takes into account regular unemployment, under-employment, and the low age of average labor market exit. Figure 1 shows the developments from the peak in 2007 to the latest available annual data from 2011 with the X-axis showing the 2011 total hours worked/capita and the Y-axis the change from 2007 to 2011.

Figure 1 shows several things. With just 594 hours worked/capita in 2011 on average, the French work less than anyone else in Europe or the United States. Probably this is mostly due to structural issues and regulation like the 35-hour work week and low retirement ages. Largely because of this low number of hours worked, French workers are productive. But more French will have to begin working and/or work longer than today to spur the economy. Increasing jobs and the total labor input in the French economy will be the key domestic economic challenge for the next French president. That task will entail further labor market liberalizations. Perhaps a “Nixon goes to China” moment is in store for Hollande in the form of a future clash with the French labor unions.

Spain, at 673 hours worked/capita in 2011 (when the unemployment rate was lower than today) is on this measure doing better than its 25 percent unemployment rate would suggest, despite the 86-hour decline in hours worked from 2007 to 2011. That Spain can muster such high total hours worked with 25 percent recorded unemployment is indicative of Spain’s perverse dual labor market structures, which allow a small protected segment of the population to work really long hours, so many Spaniards are unemployed.

Related to its labor market problems, France is saddled with a dismal performance on competitiveness as manifested by sagging export performance since the beginning of the crisis. This is illustrated in figure 2.

It is well known that both Italy and Portugal have deep-rooted competitiveness problems. Figure 2 shows that France has hardly done any better since the peak in 2007. This record suggests that unless the next French president embarks on a structural reform path similar to the ones taken in the euro area periphery, it might end up the new sick man of Europe in just a few years.

Figure 2 also provides some hope to Spain, whose export performance since 2007 has surpassed that of Ireland and Germany, although it is a less export intensive economy. Spain can thus expect external demand to mitigate the adverse effects of its fiscal austerity and private sector deleveraging. Spanish export growth since 2007 is almost twice as high as that of the UK over the same period. This achievement indicates that having your own currency is hardly a panacea for restoring external competitiveness. Structural domestic economic reforms like those in Spain might be a better solution than a depreciating currency. Indeed, one might ask those advocating that Spain needs to quit the euro to regain its competitiveness, if it is not soon time for the UK to quit Sterling?

All told, Hollande essentially has no choice but to govern as a centrist social-democrat, eschewing a radical new direction in euro area policies and staying on today’s path.

The Fiscal Compact and the new euro area fiscal surveillance rules might well be to the advantage of Hollande and Europe’s center-left more broadly. For one thing, these constraints effectively eliminate large scale tax breaks as an electoral platform for the center-right. (Republicans in the United States should note that the euro area rules would not permit the deceitful budgetary assumptions that underpin Representative Paul Ryan’s recent budget proposal, replete as it is with unspecified spending cuts and eliminating of unspecified tax breaks.) For a lesson on future euro area elections, look no further than the sorry plight of Germany’s center-right Free Democratic Party (FDP), which can no longer lure voters by calling for large additional tax cuts in Germany without falling foul of the new fiscal rules. As a political force, the FDP has been neutered.

There is no doubt that the Fiscal Compact’s forced coordinated austerity will precipitate a regional slowdown. But in light of the global economic situation, this might not be a bad time for a euro area push toward fiscal consolidation. Consider the possibility of fiscal consolidation being postponed. The IMF’s Fiscal Monitor makes it clear that eventually all industrialized countries need sizable fiscal consolidation. From a quasi-mercantilist point of view, it makes sense for the euro area to implement austerity now, while both the U.S. and Japan continue heavy fiscal and monetary stimulus and China still grows at 8 percent a year and helps prop up other commodity exporters. Assuming that my colleague Nicholas Lardy is right about a possible significant slowdown in China’s economic growth in 3-5 years, with adverse consequences on the rest of the world, postponing inevitable austerity might mean having to undertake it in an even more hostile global economic climate in the future.

By focusing on tight spending rules at the national level, the Fiscal Compact leaves only centralized euro area level stimulus options available for European leaders. But such a development will help strengthen the “European center” and expand the availability of jointly guaranteed European debt. This centralization could take the form of a bigger European Investment Bank (EIB) balance sheet or even new forward-looking European Project Bonds. Looking down the road toward the possibility of eurobonds, such a step is a far better way to stimulate the European economy than having Germany bear the load of a new domestic stimulus.